Instructions

ZOOM IN by clicking on the page. A slider will appear, allowing you to adjust your zoom level. Return to the original size by clicking on the page again.

MOVE the page around when zoomed in by dragging it.

ADJUST the zoom using the slider on the top right.

ZOOM OUT by clicking on the zoomed-in page.

SEARCH by entering text in the search field and click on "In This Issue" or "All Issues" to search the current issue or the archive of back issues
respectively.
.

PRINT by clicking on thumbnails to select pages, and then press the
print button.

SHARE this publication and page.

ROTATE PAGE allows you to turn pages 90 degrees clockwise or counterclockwise.Click on the page to return to the original orientation. To zoom in on a rotated page, return the page to its original orientation, zoom in, and
then rotate it again.

CONTENTS displays a table of sections with thumbnails and descriptions.

ALL PAGES displays thumbnails of every page in the issue. Click on
a page to jump.

This finding makes sense. The research points out that EM countries
are largely segmented from global capital markets and country-specific
factors drive their investment returns – matters like political risk, inflation,
credit risk, corporate governance, regulations and demographic profile.
As a practical example, in a DM portfolio, the performance of say, a Swiss
pharmaceutical company, in any period could depend on whether it is Swiss,
a pharmaceutical company or certain other characteristics of the company or
industry – for example, its yield, volatility or past performance. In contrast,
in an EM portfolio, the performance of a Thai pharmaceutical company will
generally be determined predominantly by the fact that it is Thai.
The research also offers guidance to super funds considering how best to
get EM exposure in their equity portfolios. For instance, manager skills that
work in DM may not work in EM portfolios. In particular, a manager with a
good bottom-up investment style, or with good industry or factor insights,
can play an important role in DM, but in EM, the lack of country insights
spells danger – the manager is ignoring the dominant driver of returns. The
manager’s impressive track record in a fund’s DM portfolio is less likely to
be replicated if the fund extends the manager’s mandate to include EM
countries. Funds pursuing an active EM equity approach are better off finding
specialist EM managers which focus primarily on country allocations, with
other considerations second order. In other words, the ‘bang for your buck’
approach to spending a fund’s fee budget on EM will be to find a manager
with ‘country smarts’.
The research also looks at how funds can adopt a passive approach to
EM, perhaps due to fee constraints or the lack of capacity in good active EM
managers. A typical EM index concentrates around 50 per cent of a fund’s
portfolio in just three countries, and around 80 per cent of a fund’s portfolio
in just eight countries. The report emphasises the importance of country
allocation, and suggests funds look for rules-based strategies that provide
diversification of country risk away from the country concentrations of a
market capitalisation-weighted EM index. One sensible way for funds to get
this country diversification without forgoing the attractive qualities of passive
investing—lower fees, transparency, higher capacity—may be to capitalise
on the ‘smart beta’ trend and consider an EM portfolio with more equally-
weighted country allocations.
Raewyn Williams is director of research at Parametric.
Superfunds July 2017